Tagged: Commodity

One-year returns delivered by a significant number of overseas funds have been impressive. The top two funds have delivered a return of about 43-47 per cent over one year as on Thursday, according to Value Research data, while six funds have given a yield ranging 32.62-38.17 per cent. Two other funds in the top-10 list had given a return of about 28 per cent during the same period.

Still it is surprising that Indian mutual fund investors are yet to warm up to the idea of investing in international mutual fund schemes offered by Indian fund houses. The advantages of investing in overseas funds are many. The chance of owning shares of global blue-chips, such as Microsoft, Google, GE, Facebook and Apple is not something to be missed by Indian investors.

That the weakening of the Indian currency against the US dollar will always give the investments an edge is something they should give a thought to, apart from the fact that they are paying in Indian currency for their investment. A hot economy like China too, offers immense growth opportunities. This also helps investors to diversify their risk as they would have realised by investing in Indian equity or MFs that have lagged their global peers in recent months.

However, Indian mutual funds have been able to mop up only a paltry sum from the domestic investors for their international offerings. In fact, only a handful of schemes out of about 70 international funds have assets in crores. Many schemes have been unable to mop up even Rs 1 crore as at the end of June quarter this year.

P. Phani Sekhar (Fund Manager-PMS), Angel Broking, said while the Indian rupee had depreciated by 14.74 per cent in the last one year, gains have been made by investing in global markets. He said while the Dow Jones index had given a return of 16.68 per cent in one year, Nasdaq had given 22.71 per cent, Nikkei of Japan a whopping 67.61 per cent and FTSE of England 18.4 per cent.

JOY UNLIKELY TO LAST

Phani Sekhar said many of these markets rallied from oversold levels. “While the growth outlook was indeed better in the US and Europe compared to last year, valuations are ahead of fundamentals,” he cautioned, adding that while the rupee might depreciate this year too, “world markets may not provide the joy unlike last year”.

On why Indian investors have not warmed up to global investments, Phani Sekhar said these funds were new to India and “it is a sheer coincidence” that in the initial years, they had given good returns. As they had outperformed by a huge margin, it was possible that the AUM of many of them may go up in the near future.

“But he felt that “from a long-term perspective, investing in international funds is more suitable from a diversification than an outperformance objective”.

On whether investing in the US markets or Asian markets was better, he said this depended on the investment objective. He said if “diversification is the motive, US markets are better, while Asia can be the preferred choice if growth is the objective.”

The economic slowdown, inflation and steep interest rates have been dampeners for the real estate sector. But if these conditions persist, they can work to the advantage of home buyers — especially in the National Capital Region and Mumbai where property prices have soared unreasonably high. A price correction is highly probable.

“Developers with large unsold inventories of high-end and luxury units will have to lower prices as the current run of sales through innovative marketing and offers such as the 20:80 schemes are coming to an end,” Shweta Jain, executive director of real estate consultancy Cushman and Wakefield, says. Despite lobbying with the government for incentives, developers say there isn’t much hope of these coming, at least not until the elections due next year.

All this piled pressure on developers to cut prices. “There’s an undercurrent to cut prices to push sales. Developers are short of cash. But this isn’t yet visible on the ground,” CB Richard Ellis MD Anshuman Magazine explains. There’s a demand for residential property. But, other than the poor sentiments, sky-high prices are slowing sales.

A developer explains: The problem lies with the fact that only parts of projects launched in the last three to six months are sold. The remaining inventory in the same project is unsold. The developer can’t slash rates for the unsold units. If he does so, earlier buyers who purchased when the project was launched, too will ask for reduced rates.

Jain says despite poor sales, many developers are still holding on to their quoted rates and the declines over the past quarters are marginal, But “there are expectations that prices would be lowered given the mounting cash-flow problem resulting from low off-takes, mounting input costs and debt servicing.”

She says the scenario is especially true in the NCR and Mumbai where developers have launched major high-end and luxury projects. End-user driven markets in cities such as Bangalore, Chennai and Kolkata are still recording reasonably healthy transactions as projects are priced more reasonably.

The market rates are likely to be first cut by investors who buy projects for the short term. Most of them bought around one to two years ago. Since then rates have appreciated by around 20% to 30% in the NCR and Mumbai. Now, with interest rates rising and prices stagnating for at least three months, many are tempted to sell and exit.

An investor says there’s little hope of prices going up in the next one year. At the same time, he has to pay 11% interest on investment, that’s if he borrowed money or lose a like amount in opportunity cost. Prices have appreciated since he bought the property and buyers are a lot fewer. So, the only way out is in cutting price and pulling out. Even then, Magazine says, this will take a while to happen because investors are still hoping that prices will appreciate.

Builders are putting up a brave face and saying there’s no scope of a major price slash yet. “Input costs have skyrocketed in the last year and we work on low margins,” Vineet Gupta, ED, Ajanara group, says. If prices have to be shaved, there’ll be no new launches, which will affect supply and in the long term, because demand is perennial, rates will rise. Ultimately, realtors won’t be able to build by cutting losses.

The promise of fixed returns from a broker means practically nothing, unless you know where the returns are going to come from.
AARATI KRISHNAN | August 3, 2013 | Business Line

In recent years we have been rather complacent about our financial markets. Whatever else may be wrong with our economy or government, we thought, our financial markets, with their state-of-the-art trading systems and hyper-active regulators, were surely immune to crisis.

No-man’s land

But the trading halt and suspended contracts at National Spot Exchange (NSEL) this week have turned this notion on its head. This controversy brings to light how an entire exchange (which recorded a Rs 3 lakh crore turnover last fiscal) was functioning in a no-man’s land, with neither the Forward Markets Commission nor any other regulator taking active responsibility for it. Given that some of these contracts were on obscure commodities without a clear benchmark price, brokers and speculators made merry by roping in high net-worth investors and offering them ‘assured returns’ from punting on such commodities as raw wool and castor-seed. While the going was good, investors made their money. But when regulators belatedly took note, the exchange was thrown into a payments crisis and called a halt to trading. This has reportedly left many affluent investors, who had taken positions on the exchange via their brokers, in the lurch.

While this episode should lead to some soul-searching for the regulators, what about the lessons for investors? There are many.

Lure of fixed returns

The first is that Indian investors, who are the soul of conservatism when it comes to financial products such as equities or bonds, seem to throw caution to the winds whenever anyone mentions a ‘guaranteed’ return. It was the ‘assured’ returns of 15 per cent (annually) that led affluent investors to lend money to traders in the NSEL for punting on obscure commodities that they neither tracked nor understood.

It was also very similar ‘guaranteed’ returns that prompted others to park money in the Sahara real estate firms’ convertible bonds. It was similar projections that prompted investors to flock to plantation schemes and emu farms without asking too many questions. Investors avoid equity and mutual fund products like plague because they offer only market-linked returns, which they know are subject to fluctuations. SEBI too bars equity and mutual fund players from offering any assured return even on fairly predictable products such as Fixed Maturity Plans.

But the same investors seem to assume that any product that holds out ‘fixed’ returns, even by way of verbal assurances, is automatically risk-free.

Guarantee checklist

It is time investors realised that the regulated but market-linked products are much safer than ‘assured return’ products that function in a regulatory vacuum. After all, the promise of fixed returns from a broker, fund-raiser or middleman means practically nothing, unless you know where the returns are going to come from.

So the questions investors need to ask of every such scheme is: How is this scheme hoping to make money? Is there really a legitimate market capable of generating a fixed 15-20 per cent return on a sustainable basis? If so, why haven’t professional investors such as Rakesh Jhunjhunwala or your mutual fund caught on to it already? If the scheme to trade in wool, build a resort or grow emus doesn’t live up to its potential, does the guarantor have a back-up plan to deliver the assured returns? If he says he has, do his financials support it? And if he reneges on his promise, who is the regulator you can complain to? As long as these questions are unanswered, any ‘guarantee’ isn’t worth the paper it is printed on.

Exchange troubles

Of course, the NSEL saga also exposes the fragility of another business that everyone thought was a sure money-spinner — the business of operating a stock exchange. When MCX launched its Initial Public Offer in early 2012 in flat markets, it was over-subscribed by 50 times, because the business of running a stock exchange seemed so overwhelmingly attractive then.

Exchanges had a natural monopoly as traders usually flocked to the exchange that offers the most liquidity. It was seen as fast growing and highly profitable too. MCX’ revenues had grown at 46 per cent annually in the three years preceding the IPO. Its operating profit margins, like its peers NSE and BSE, stood at above 60 per cent. But recent events have shown that the exchange business has several imponderables too. Traded volume, the only metric that seems to decide the worth of an exchange, can vanish pretty quickly in adversity, taking valuations with it. A negative turn in the market, a new tax (for instance, Commodities Transaction Tax) or a run-in with the regulator can demolish volumes, trim profit margins and sharply level market valuations that hinge on them. The battering witnessed by the stocks of MCX and Financial Technologies in the last few days is proof enough of this.

COIMBATORE: Equity mutual funds (MFs) that invest in stocks of companies engaged in the commodities business have plunged ending up in the bottom of the performance charts so far this year. The fall has been quite steep in funds, which have an exposure to stocks of gold mining companies.

With prices of key industrial commodities and precious metals declining globally following the drop in demand, funds focusing on the segment have taken a hit. Funds that invest exclusively in gold mining companies have been the worst performers among the 460-odd equity-oriented MFs.

Equity funds that invest in gold mining companies have lost 39% to 43% so far this year with their net asset values (NAVs) quoting close to their yearly lows. In contrast , gold exchange traded funds, which closely track the prices of the yellow metal , have declined by only about 15% this year.

Stocks of gold mining companies usually fall and rise at a faster pace than the yellow metal. Incidentally, NAVs of most gold funds have slipped below the psychological Rs10 mark, the rate at which new fund offers open for subscription.

Interestingly, funds that focus on companies engaged in the agricultural commodities business have registered gains and are among the top-20 performers in the equity MF space in 2013.

“Commodities are cyclical in nature. They have been going through a trough as global growth is falling,” said Ramanathan K, CIO, ING MF. “There has been a correction in global commodity prices as China is calibrating its economy and has slowed its fixed asset investments ,” said Gopal Agrawal, CIO, Mirae Asset Global Investments India. The strengthening of the dollar index has also adversely impacted commodity prices, he said.

Funds, which focus on commodities such as base metals, too have fallen declining 9.7% to 14.9% so far in 2013. While the benchmark Sensex and Nifty posted less than 1% decline, diversified equity MFs dropped 7.7% during the period.

Equity MFs that invest in stocks of commodities are typically a lot more volatile than other asset classes. “This is a volatile asset class. Investors should have an appetite for volatility,” Agrawal said. But with prices of several commodities ruling close to their cost of production, the category presents a good investment opportunity, industry officials said. Investments should however be made in a systematic manner, they said.

Think you know all about Gold? Think again. Here are 10 facts that will give you a better understanding of the gilded stash in your locker. And, in case you didn’t cash in on the tumble in prices earlier this week, fret not: the gold story isn’t over.

1) We still don’t own enough gold

If all the gold ever mined was made into bricks it would end up in a block 20 metres cubed or around 60 ft wide, high and deep. This means if all the gold in the world was gathered in one space it would fill just one large house. At the price of $1,500/troy ounce, reached on April 12, 2013, one tonne of gold is worth approximately $48 million. The total value of all gold ever mined would exceed $8 trillion at that price. Though it sounds like a lot, there is actually little to go around. India owns 18,000 tonnes of above-ground gold.Distributed equally, each Indian would barely get half an ounce of gold, a figure significantly below consumption in Western markets.

2) Gold reserves will last another 12 years, but…

The volume of gold available for mining is a product of both geology and economics. Measuring the volume of gold ore available for mining will depend on what quality of gold ore grade is classed at a specific time as a viable ‘reserve’ ore that can be economically mined at the current or expected gold price. The US Geological Society estimates global gold reserves at around 51,000 tonnes. On this basis, if mine supply were the only source to satisfy current levels of demand, these reserves would last 12 years or so. Known reserves have remained fairly constant over recent years since production from new sources has replaced reserves that have been exploited.

3) We are close to gold’s minimum support price

The global average production cost of gold is about $1,200 an ounce. It was quite stable in the 1990s but has risen by almost 70% over the past five years. So, this month’s drop to $1,360 an ounce brings gold closer to the global average production cost. It couldn’t have been worse timed for gold companies such as Barrick Gold Corp and Newmont Mining Corp, the world’s two largest producers. Despite 12 consecutive years of rising gold prices, shareholders have lost faith in the gold-mining industry, which has seen soaring production costs and made money-losing acquisitions. If prices stay low, the smaller players that carry out exploration and development will get squeezed out, eventually affecting gold supply.

4) Now gold too is made in China

Just 20 years ago, that country wasn’t even on the gold map. Yet China set out to build up its gold mining capacity and succeeded to the extent that it’s now the world’s biggest gold producer. China produced 400 tonnes in 2012 , and expects to touch 450 tonnes by 2015. None of the metal ever leaves the country. According to the World Gold Council, China is the world’s sixth-largest holder of monetary gold. The collapse in bullion prices will encourage China’s top gold producers, Zijin Mining and state owned Shandong Gold Group, to prowl around for cash strapped small- and mid-sized miners overseas.

5) Americans are going back to gold as money

More than a dozen states in the US, led by Utah, Arizona, Kansas, Texas and South Carolina, are preparing to adopt gold and silver coins as money, like the dollar. Lawmakers in these states distrust the Federal Reserve and fear that the greenback may become worthless. The US Constitution bars states from coining money and also forbids them from making anything except gold and silver coins. Advocates say that opens the door for the states to allow bullion as legal tender. How will it work, given gold’s fluctuating prices? The process is being finalised. Gold is mined both in Arizona and Utah, while Nevada is the largest US producer.

6) There is gold in your smartphone

After silver, gold is the best conductor of electricity. It also doesn’t corrode or tarnish whenever it comes in contact with water. This makes gold the perfect, albeit expensive choice, for the consumer electronics industry. There are 10 troy ounces (1 troy ounce =31.1034768 gms) of gold per tonne of smart phones. Some 10,000 phones weigh one tonne. With gold selling for about $1,500 per ounce, that would yield $15,000. Two hundred laptops would yield five troy ounces of gold. Recyclers typically burn circuit boards and use cyanide on the ash to separate the gold. British luxury designer Stuart Hughes has created a luxury iPhone 5 for $15.3 million, which is coated in solid gold and features both black and white diamonds.

7) Here lies the gold, just as Die Hard showed us

New York Fed’s vaults hold about 23% of the world’s official gold reserves. The secretive vault situated 80 feet below ground level round the block from Wall Street stores gold belonging to several foreign governments. Vaults belonging to the Bank of England at Threadneedle Street in London contain the second-largest stash of gold reserves. The Reserve Bank of India owns 557.75 tonnes of gold. Of this, 265 tonnes is lying in the vaults of the Bank of England and the Bank for International Settlements. Countries across the world have been concerned about their gold deposits stored abroad. Hugo Chavez brought back Venezuela’s gold reserves from the Bank of England last year.

8) Make sure your gold is not tainted

There exists a shadowy chain of smuggled gold that stretches from the conflict zones of the Democratic Republic of the Congo to the markets of Dubai and jewellery shops in Mumbai and Delhi. More than $600 million worth of gold is estimated to leave Congo every year, and armed groups are funding their operations through control of a significant percentage of that amount. The WGC (World Gold Council) and other industry bodies are now enforcing standards for greater traceability in supply chains. Under the Dodd-Frank financial regulation act, US-listed companies that source gold, tungsten, tantalum and tin from Congo or its neighbours must assure the US stock exchange regulator that their business is not helping fund conflict.

9) Silver still packs a punch

The price of silver has risen over 100% during the past four years, and it has risen more than 500% over the past 10. Silver has been in a long-term bull market that has only recently paused to consolidate its tremendous gains after peaking at $49/ounce level in April 2011. The silver market is seeing a new wave of buying emerge once again as prices soften. Regardless of price, metallic silver has strategic importance in industrial and medicinal applications for which it cannot be readily replaced.

10) Yes, gold story is still alive

Physical demand has picked up momentum. India was the first to respond, followed by Dubai, Japan, Europe and China. The US Mint has sold 147, 000 ounces of gold coins in April so far. This is already nearly as much as in the whole of January, when coin sales peaked since the summer of 2010. Since the price slide, nearly 100,000 ounces of gold coins have been sold within just three days — the last time such a high volume was sold was in 2008 following the collapse of US investment bank Lehman Brothers. Central banks bought 534.6 tonnes in 2012, the highest level since 1964. Private investor demand for gold bars and coins in 2012 was 20% above its 5-year average.

August 15, 1971: Gold standard abandoned

Struggling to pay for the cost of Vietnam war, President Richard Nixon abandons the so-called “gold standard”. The dollar had been fixed at a rate of $35 to an ounce. That peg is dropped and gold starts to rise.

A look at the rise in gold prices since 1979:

Jan 31, 1979 – Rs 595/10gm

Soviet invasion of Afghanistan in January 1980 – International political tension soars after the Soviet invasion of Afghanistan. Gold hits a record of $850 an ounce on January 21.

Confidence returns in 1981-82: Gold prices begin to fall as investors regain some confidence in the US economy and the dollar. Inflation also begins to slow.

Jun 30, 1982 – Rs 954/10gm

July 31, 1985 – Rs 1,221/10gm

July 1986 – South Africa: Western nations impose sanctions on South Africa in protest over its apartheid laws. Gold prices jump 23% between July and October as traders fear that South Africa might cut gold exports in retaliation.

1987 – Inflation returns: Gold price hits $500 per ounce for the first time in five years as inflation accelerates again in the US.

Jan 31, 1989 – Rs 1,722/10gm

July 30, 1993 – Rs 3,955/10gm

Banks start selling gold in July 1996-99 – Gold prices fall on news that the International Monetary Fund had been considering selling 5 million ounces to help pay for debt relief in the developing world.

Jun 30, 1997 – Rs 3,921/10gm

In July 1999 gold hits a 20-year low of $252.8 an ounce.

Central banks start to follow the IMF’s lead. The Swiss National Bank announces a plan to sell 1,400 tonnes of gold, Australia also sells a large part of its reserves.

Oct 29, 1999 – Rs 4,340/10gm

The British government sells more than half of its gold â€” almost 400 tonnes â€” between 1999 and 2002 raising $3.5 bn.

Feb 28, 2003 – Rs 5,509/10gm

May 31, 2005 – Rs 5,896/10gm

August 2005 – Hurricane Katrina: Hurricane Katrina boosts oil prices and raises fears that a period of quicker inflation was returning. By December 2005 gold is at $536.50 an ounce, the highest level in 24 years. The weak dollar also helps boost gold throughout 2006.

May 31, 2006 – Rs 9,844/10gm

Jul 29, 2007 – Rs 8,595/10gm

Credit crisis in August 2007 – Investors buy gold as a safe haven amid the growing financial crisis. The falling dollar and rising global inflation also boost the metal.

2008: The world’s central banks sell gold.

Mar 31, 2008 – Rs 12,559/10gm

Oct 31, 2008 – Rs 12,597/10gm

Dec 31, 2010 – Rs 20,184/10gm

Jul 29, 2011 – Rs 22,457/10gm

Nov 30, 2011 – Rs 28,378/10gm

2012: Central banks become aggressive buyers, purchasing a record 534 tonnes to replace the paper currency in their national reserves.

Global markets are cheaper and a falling rupee can add to your returns.

Will the rupee ever recover? That is the question on everyone’s mind, with India now running a record trade deficit. A weak rupee can have many adverse consequences for you, as a consumer, employee and tourist abroad. But can you make money from it? You can, if you own international funds, or funds that invest in foreign equity and overseas mutual funds.

Some of these funds have had a good run over the past 12-18 months. And the performance didn’t just come from the rupee’s weakness.

The rupee depreciated by about 5 per cent in the last one year, but the top ten international funds have delivered returns of 12 to 31 per cent in the last one year. Domestic equity funds, in contrast, managed an average 3 per cent returns.

Of course, there were underperformers among international funds. But the right choice of two or three global funds would have perked up your overall portfolio returns.

So what must you look for while parking money in international funds?

First, a recap of their recent performance. The global funds now available to Indian investors fall into several categories — those that invest in emerging markets, global indices, commodities, real estate and hard assets.

WINNING THEMES

An analysis of their returns over the last one and three years shows that two themes worked well.

One, funds which invest in Asia. In the last three years and especially over the past one year, many funds which invest in Asian markets — China, Singapore, Indonesia, Taiwan and South Korea — have done extremely well, delivering 15-22 per cent. These markets offer attractive avenues for investment in sectors such as semiconductors, energy, utilities, mining and telecommunication services. Some markets such as Mexico and Argentina too have rallied quite well, though Brazil continues to be a laggard in the Latin American market.

Funds which invest in developed markets, on the other hand, saw very few outperformers. But Birla Sun Life International Equity – Plan A has been a consistent performer in this category as it invests in the US, Germany and a few other European countries, making it a well diversified basket. Markets in these countries are trading at multi-year highs.

The second winning theme was real estate, but only one fund capitalised on this. ING Global Real Estate has delivered exceptional returns of 15.3 per cent over the past three years and 21 per cent in the last one year. The scheme invests in stocks and REITs from across the world.

LOSING THEMES

While international funds playing on Asia did well, those betting on commodities and natural resource-reliant countries fared poorly.

The weak global economic outlook led to a very sedate performance from a range of commodities in the past year. Coffee and sugar prices, for instance, have fallen substantially on higher trade surpluses.

With key consuming nations such as Europe seeing poor demand, crude oil and base metal prices too have been flat. Funds which bet on commodities and agricultural products or specific countries expecting them to benefit from a rally have seen erosion in NAVs. Mirae Asset Global Commodity Stock, ING Global Commodities, Birla Sun Life – CEF – Agri Plan, have all delivered poor returns for this reason with declines of 4-5 per cent in the last one year.

In a surprising twist, funds that bet on gold mining stocks have proved laggards too. Gold prices have fallen, with its safe haven allure fading with rebounding equity markets. On top of this, stocks of gold mining companies have trailed the yellow metal. Companies such as Newcrest, Goldcorp and Kinross have witnessed around 30 per cent fall in their stock prices in one year.

This has decimated NAVs of DSPBR World Gold Fund and PineBridge World Gold Fund, which invest in this space, with a 18-19 per cent erosion in their NAVs. Among funds riding on such themes, L&T Global Real Assets (earlier Fidelity Global Real Assets) has been a consistent performer. It has delivered over 12 per cent annually over the past three years, outperforming both domestic funds and most international schemes.

WEIGHING RISK-RETURN

Given this mixed performance, should you invest in global funds? There are many positives to it.

First, you diversify risks by investing across markets. The international basket is much wider than the domestic.

Second, global markets are cheaper. For instance, the DJIA, S&P 500, FTSE and CAC trade at 13-14 times historic earnings (Bloomberg), while domestic benchmarks are at around 16 times.

Two, despite the rally in the developed markets, the valuation multiples are also at par or lower than their historic averages. Third, the icing on the cake — gain from a falling rupee.

Do, however, take the following points into account before the plunge.

One, international funds are treated as debt funds and taxed accordingly. Two, while global funds may appear good for diversification, Indian markets are likely to offer better returns over the long term. Hence they must form only 5-10 per cent of your portfolio.

Finally, based on long-term track record and mandate, you can invest in any two of the following: Templeton India Equity Income, Birla Sun Life International Equity, L&T Global Real Assets and Kotak Global Emerging Market. Two other funds, which have done well over the past couple of years JP Morgan JF Greater China Equity Offshore, JP Morgan JF ASEAN Equity Offshore, can be monitored closely for investments later.